Why Would an Investor Choose a Bad Hotel Over a Good One?  

By Pierre Marechal, Vice President, Strategic Advisory & Asset Management at JLL

A hotel that needs renovation, has an underperforming restaurant, and isn’t achieving the rates of its competitors may not immediately sound like an attractive investment opportunity.

Yet under the right circumstances, those shortcomings may be precisely what makes it interesting.

At a recent industry forum, when we discussed where capital might be deployed in Indonesian hospitality over the next couple of years, my preference was for repositioning and value-add opportunities, particularly in established destinations such as Bali.

The important part of that answer was not Bali itself. It was the type of asset.

In a destination where demand is visible to everyone, investors need to be careful about assuming that market growth alone will produce an attractive return. Strong tourism numbers attract capital, and capital eventually produces more hotel rooms.

I would therefore rather look for an existing asset with something important that is difficult to replicate, but where the hotel itself is not yet performing as well as it could.

That distinction is at the heart of value-add hospitality investing.

What If a Hotel’s Biggest Weakness Is Actually Its Opportunity? 

Consider a resort occupying an excellent site but with rooms that haven’t been renovated for some time. Its food and beverage (F&B) offering has become dated, its commercial strategy is not particularly sophisticated, and the property is under-indexing against hotels it should reasonably compete with.

There is plenty wrong with it, but there are also several identifiable ways to improve it.

Rooms can be renovated. Restaurants can be reconcepted. Revenue management and distribution can be improved. The hotel’s positioning can change, and marketing can be redirected towards different customer segments. Under the right contractual circumstances, an owner may even be able to reconsider the operator.

Now consider another hotel with an excellent physical product and a strong operation, but a fundamentally weaker location.

There may be very little wrong with the hotel itself, but also very little an asset manager can do about its biggest disadvantage.

That is why, when evaluating a value-add opportunity, I am interested not only in what is wrong with an asset, but in what kind of problem it has.

The One Thing Even the Best Hotel Operator Cannot Fix 

Location is the obvious example, although scarcity can take several forms.

Beachfront is finite. A particular view may be impossible to reproduce. A heritage building, an unusual site, direct access to a demand generator or a large parcel of land in an area where sites have become difficult to assemble can all give an asset characteristics that future competitors cannot easily recreate.

None of these makes an investment attractive at any price, and an exceptional site can still support a poorly conceived hotel. But they provide an underlying advantage on which an owner may be able to build.

This is where an imperfect existing property can become more interesting than a clean development opportunity.

If the things that are wrong are genuinely fixable and the things that are right are genuinely scarce, there may be a route to creating value that does not depend entirely on the wider market continuing to rise.

Where Will the Investment Return Actually Come From? 

“Repositioning” is one of those words that can cover almost anything in hospitality, so the investment case needs to be more specific.

When rooms are renovated, what customer can the hotel attract that it cannot reach today, and what rate premium should result?

Converting an underutilised area into additional rooms or another revenue-generating space raises a key question: what return will that investment produce?

Should F&B be changed, is the objective to make outlets independently profitable, strengthen positioning, increase local patronage, or support higher room rates?

Where distribution is inefficient, how much margin could realistically be recovered through a refined channel mix?

Finally, if the operator is part of the problem, what can actually be changed under the existing agreement—and at what cost?

The investment becomes much more credible once every proposed improvement is connected to a measurable economic outcome.

When Is an Underperforming Hotel Just a Bad Investment? 

This is where discipline becomes particularly important.

An underperforming hotel is not automatically under-managed.

In some cases, the asset is simply in the wrong place. At other times, too much competing supply has entered the market. It is also common for original development costs to be too high for the rates the location can support. Finally, a building may have physical constraints that prove prohibitively expensive to resolve. And sometimes the owner has already tried most of the obvious interventions.

In those cases, describing the asset as “value-add” can become a convenient way of assuming that better management will solve a structural problem.

Due diligence therefore needs to separate operational problems from structural ones. It should also establish what the proposed fixes will cost, how long they will take and how much disruption they may create while the hotel remains operational.

The purchase price must then reflect that complexity.

Paying a fully stabilised price for an asset that requires several years and substantial capital to become stabilised rather defeats the purpose.

Final Thoughts: Why the Best Hotel Investments Don’t Rely on Market Growth Alone 

What I find attractive about a genuine value-add strategy is that the investment does not have to rely entirely on predicting the market correctly.

Any hotel investor remains exposed to external factors: tourism demand, air capacity, economic conditions, new supply and changing consumer preferences. Those risks cannot be eliminated.

But if an existing hotel also offers identifiable opportunities to improve its product, positioning, commercial strategy, operating efficiency or use of space, the owner has additional ways to influence the outcome.

That is particularly relevant in established destinations where strong recent performance may tempt investors to extrapolate market growth indefinitely.

I would rather underwrite an investment where part of the return comes from improvements we can identify and execute than one where most of the upside depends on the market continuing to do what it has just done.

The imperfect hotel can therefore be more interesting than the perfect one, provided the imperfections are the right ones.

For me, the most attractive version is often quite straightforward: a difficult-to-replicate asset with problems that capital, commercial expertise and active asset management have a realistic chance of solving.

The hotel can be fixed. The location usually cannot.

Read the Chinese article here.

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A Hotel’s Room Rates Rise 12%. Is It Outperforming — or Is the Market Doing the Heavy Lifting?  Why Smart Hotel Owners Obsess Over These “Invisible” Metrics A Hotel Brand Can Bring More Guests. But Does It Bring More Profit?   Asia’s Green-Steel Race May Be Decided Before the Scrap Ever Reaches the Furnace.